Filing summary
Entity and period: The supplied filing is CONSOL Energy Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed February 10, 2012. This does not match the metadata naming CNX Resources Corp. or describing the period as 2011 Q4. The filing includes unaudited quarterly data, but its principal reporting period is the full 2011 fiscal year.
Business context and financial performance
CONSOL Energy produced coal and natural gas, alongside related transportation, terminal, industrial supply, land and water services. In 2011 it produced 62.6 million tons of coal and 153.5 net Bcfe of natural gas. Its two major gas joint ventures with Noble Energy and Hess were established during the year.
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue and other income | $6.117 billion | $5.236 billion |
| Net income attributable to CONSOL shareholders | $632.5 million | $346.8 million |
| Diluted earnings per share | $2.76 | $1.60 |
| Net cash from operating activities | $1.528 billion | $1.131 billion |
| Capital expenditures | $1.382 billion | $1.154 billion |
| Total debt | $3.198 billion | $3.211 billion |
| Cash and cash equivalents | $375.7 million | $32.8 million |
| Working capital | $509.6 million | $(549.8) million |
Coal performance improved: average price per ton sold rose 17.8% to $72.25, while average costs rose 11.3% to $52.08; the reported price-cost margin increased to $20.17 per ton from $14.55. Gas production grew about 20%, but the average realized price, including hedges, fell 16% to $4.90 per Mcf. Gas segment pretax earnings declined to $130 million from $180 million.
Fourth-quarter net income attributable to shareholders was $195.6 million, or $0.85 diluted EPS, versus $104.5 million, or $0.46, in fourth-quarter 2010. Quarterly sales were $1.383 billion; the filing’s quarterly table reports freight revenue separately.
Material changes and notable items
- Coal segment pretax earnings rose to $933 million from $536 million, led by low-volatile metallurgical coal: its average sales price increased 31.1% to $191.81 per ton, and segment pretax earnings reached $681 million.
- Gas production rose to 153.5 Bcfe from 127.9 Bcfe, supported by drilling and the 2010 Dominion acquisition. Lower gas prices and weaker hedging settlements reduced average realized price and margins.
- CONSOL recorded a $115.8 million pretax charge to permanently close Mine 84; management expected the closure to save $18 million annually in pretax cash costs. It also recorded a $16.1 million debt-extinguishment loss.
- Other income included gains on the Hess and Antero transactions and a loss on the Noble transaction. The Noble sale also generated deferred notes receivable and a drilling-cost carry; the filing’s transaction accounting and cash proceeds should be reviewed separately.
- Operating cash flow exceeded capital expenditures by about $145 million. Investing cash use was $578.5 million, compared with $5.544 billion in 2010, when the Dominion and CNX Gas acquisitions drove substantial outflows. Financing cash flow was a $606.1 million outflow in 2011, following large debt and equity issuance in 2010.
Liquidity, debt and outlook
At year-end, CONSOL had $3.198 billion of debt, primarily senior notes carrying coupons of 8.00%, 8.25% and 6.375%. Its $1.5 billion revolving facility had no borrowings and approximately $1.234 billion available after letters of credit; CNX Gas’s separate $1.0 billion facility had no borrowings and approximately $930 million available. The company reported covenant ratios below limits, including a 2.15-to-1 leverage ratio and 5.80-to-1 interest coverage ratio. Management said operating cash flow and borrowing capacity should fund working capital, planned investment, scheduled debt service and dividends, subject to operating conditions and other factors.
Management budgeted approximately $1.544 billion of 2012 capital expenditures: $676 million for coal, $623 million for gas, $135 million for water and $110 million for other uses. Coal production guidance was 59.5–61.5 million tons in 2012, 60.5–62.5 million in 2013 and 64.5–66.5 million in 2014. Gas production guidance was 160 Bcfe net in 2012 and a 190–210 Bcfe target in 2013. These plans were subject to adjustment; the filing also noted the potential for lower gas prices and reduced drilling.
Management described continued export and metallurgical coal opportunities, but noted weaker domestic thermal demand from low gas prices, mild weather and higher utility inventories. It cited possible further gas-price pressure in 2012 from strong supply growth. Key risks include coal and gas price volatility, environmental and safety regulation, permitting delays, transport constraints, customer concentration, labor and benefit costs, and reserve and title uncertainty.
Contingencies and investor verification priorities
- Employee obligations: The balance sheet included approximately $3.06 billion of postretirement benefit liabilities. The UMWA 1974 Pension Trust was reported seriously endangered and 76.5% funded; estimated CONSOL withdrawal liability was approximately $1.2 billion, though withdrawal was not reported as planned. Verify the plan’s funding improvement measures and future contribution exposure.
- Environmental and closure costs: Reclamation, mine-closing and gas-well-closing obligations totaled about $650 million. A Northern West Virginia water-treatment plant was expected to cost approximately $200 million, with completion targeted for 2013. Pennsylvania stream subsidence costs and evolving water, air and mine rules could add expense or constrain operations.
- Legal claims: The filing describes asbestos claims, environmental matters and several royalty, land-right and other lawsuits. A Ryerson Dam claim alleged $58 million in damages; CONSOL had not accrued a liability and estimated a possible loss range of $9–30 million if found liable. Other claims have uncertain or potentially material outcomes.
- Joint ventures: Noble’s carried-cost obligation was suspended beginning December 1, 2011 after gas prices met the agreement’s below-$4/MMBtu trigger. Verify the resumption conditions, annual carry limits, partner performance and timing of expected consideration.
- Customer exposure: One coal customer accounted for over 10% of 2011 revenue, and the top four coal customers represented more than 30% of total revenue. Review contract expirations, renewals and credit exposure.
- Unusual earnings items: Separate recurring operating performance from the Mine 84 abandonment charge, debt-extinguishment loss, transaction gains and losses, tax benefits and gas hedge effects. Verify the exact quarterly and segment contributions against the audited statements and notes.